Disability and inflation

Getting a cost-of-living adjustment (COLA) rider with a disability income (DI) policy can certainly add to the price — but it can also lead to a dramatic increase in well-being for a policyholder who ends up filing a claim.

Let’s look at a case involving Jane Doe, Esquire.

Assumptions about Jane:

• 30 years old.
• Female.
• Annual income: $100,000.

Jane buys a policy that provides $5,000 per month in coverage, with a 90-day wait and benefits paid to age 70. The DI contract is an own occupation, residual/recovery policy, with a catastrophic benefit added.

Jane buys this contract from a quality carrier. It will cost her about $2,500 per year for the next 40 working years, for a total payment of $100,000, give or take a couple hundred dollars either way if she “shops “ the coverage among DI carriers.

Even if she is never disabled, the $100,000 would be well spent on protecting her lifestyle.

If she has a terrible accident or sickness the day after she puts the contract in force, the contract will pay her about $2,385,000 over her lifetime.

Her insurance representative convinces her to add a 3 percent, Consumer Price Index (CPI) inflation rider to the contract.

The scenario is the same as described above, except that adding the rider adds about $350 per year to the cost of the contract, or about $14,000 to the above-mentioned $100,000 in total premium premiums.